Definition
Quanto
A quanto is a derivative whose underlying is in one currency but settles in another at a fixed exchange rate, removing currency risk from a foreign-asset payoff.
A quanto lets an investor gain exposure to a foreign index or asset while being paid in their home currency at a pre-set rate, so they capture the asset's move without the FX move. For example, a rupee-settled product tracking the S&P 500.
Quantos are useful for Indian investors wanting pure exposure to foreign markets without rupee-dollar fluctuations muddying returns. The structure shifts the currency risk to the product issuer, who hedges it, embedding a cost in the pricing.
Related terms
- Currency Swap (FX Swap)An FX swap is a simultaneous agreement to buy a currency at the spot rate and sell it back at a forward rate (or vice versa), used to manage short-term funding and liquidity.
- Cross RateA cross rate is the exchange rate between two currencies derived through a common third currency (usually the US dollar) rather than quoted directly.
- Hedging Forex RiskHedging forex risk means using forwards, futures, options or swaps to lock in or limit the exchange-rate cost of future foreign-currency cash flows.
- S&P 500The S&P 500 is a market-cap-weighted index of 500 leading US companies, the most widely followed benchmark of the American stock market.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.